UBS On-Air: Paul Donovan Daily Audio 'Sliding into confusion'

Good morning. This is Paul Donovan, Chief Economist at UBS Global Wealth Management.

It's 7 o'clock in the morning, London time on Wednesday 11th March.

It is not entirely clear what the U.S. Administration's current communication strategy is, but the

consequence has been to create volatility in financial markets. Investors do not necessarily

like volatility unless they are short-term speculators who are able to profit from special

insights, of course. The social media post from current U.S. defense secretary Hesketh

that a tanker had been escorted by the U.S. Navy through the Strait of Ormos was taken

down and subsequently denied, but not before the oil market had reacted.

U.S. President Trump posted a warning to Iran not to mind the Strait of Ormos, but the

nature of the warning could be interpreted as revealing the limited options the U.S. has

to respond. The U.S. has claimed it has destroyed some mind-laying vessels. If the Strait

is mind, it raises the risk that oil prices will stay higher for longer.

The Wall Street Journal reports that the International Energy Agency has proposed the largest

ever release of strategic oil reserves, which has allowed crude oil prices to fall back.

So this is obviously a countermeasure that can only be used a limited number of times.

Investors are likely to continue to focus on two issues. One, when the U.S. withdraws

and two, how long Iran continues its attacks on shipping and neighboring oil infrastructure

after the U.S. withdraws. The release of U.S. February consumer

price inflation is, of course, immune from the effects of the war, but it still matters

a great deal for financial markets. The Federal Reserve should not respond to oil price

shocks. There are still enough economists at the Fed to know that this is a one-off

relative price move over which they have no control. Fed Chair Powell can hardly order

the FOMC to begin mind-sweeping operations in the Gulf.

Banks are supposed to react to inflation shocks, not relative price shocks. A broad-based

increase in prices suggests an imbalance in the economy which monetary policy can tackle.

A relative price shock suggests an imbalance in a single market, which monetary policy can

do relatively little about. So whether there are underlying inflation pressures evident

in the February data matters quite a lot. The expectation is that underlying inflation

is likely to be subdued still, giving the Fed room to ease later this year. However,

the affordability crisis in the States is not about the inflation reality, but focuses

on the price of high-frequency purchases and inflation perceptions. Getting into the

detail of the inflation report is therefore important in trying to gauge the political

pressures relevant because this may sway the U.S. administration's war policy. Already

gasoline prices are approaching a 27% increase from the lows of January, not something that

will be reflected in the data today, but certainly something that will be being noticed

by consumers. Grocery prices have risen in a more or less normal manner, but there are

some high-profile items that have soared in price. Beef prices up 15% since January

2025, coffee up over 18% are in the same period. Those are the prices that stick in consumers

minds, and they're what shape inflation perceptions, and that's what matters in judging affordability.

General and final February consumer price inflation was unchanged from the preliminary

number exactly in line with the ECB's target of 2% year over year. This is the only German

data point that is almost never revised. The picture is, of course, benign for European

inflation, and it means that the European central bank is likely to be content to continue

with its policy of masterful inactivity. That's all for the day. Have a good day.

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